What China Can Learn From America's Hot Dogs

By

David Kesmodel,

Julie Jargon and

Laurie Burkitt

Updated June 1, 2013 3:59 p.m. ET

Behind the planned takeover of Smithfield Foods Inc. by China's biggest meat processor is an intensifying push by the Asian nation to industrialize its archaic food-production system to address rampant health problems and feed an increasingly wealthy population.

In addition to Smithfield's enormous distribution network and market share in the U.S., owning the American company would enable Shuanghui International Holdings Ltd. to borrow from Smithfield's playbook to speed the development of hog farms and processing plants in China that mirror the U.S. system.

With China's deal to buy Smithfield Foods, WSJ's David Wessel says the rules of the road are getting clearer for Chinese investment in American companies: no telecom, no defense – but other sectors are fair game.

The meat business in the U.S. has been refined over decades into a system of mass production similar to making cars or televisions. Last year, 62% of the hogs in the U.S. were raised on farms with at least 5,000 head, according to the U.S. Department of Agriculture. They're often housed in vast, climate-controlled buildings, fed specialized diets of corn and soybean meal, and processed into bacon and ham by big companies like Smithfield in highly mechanized factories designed to ensure the meat is free of disease and contamination.

ENLARGE

China, the world's largest consumer of pork by far, has made strides in modernizing its system, but much of its meat production remains small-scale and outmoded. As of 2010, some 70% of pork in China still came from farms that produced fewer than 500 hogs a year, and 38% from farms with fewer than 50 hogs, according to the U.S. Meat Export Federation. Conditions on smaller farms can be squalid, with a lot of physical contact between farmers and animals, which can transmit disease. And meat processing is equally fragmented: China had some 14,720 pig slaughterhouses by the end of 2012, compared with about 600 in the U.S.

Chinese authorities and experts say the disjointed system is much harder to regulate and makes it more difficult to avoid bad practices. They have blamed the problem in large part for scandals that have gutted Chinese consumers' confidence in the nation's food supply, from tainted milk formula that killed six infants and poisoned some 300,000 others in 2008, to a series of incidents involving meat contaminated with illegal additives and frequent outbreaks of foot-and-mouth disease, swine flu, and other illnesses. This year, thousands of dead pigs were found in rivers around Shanghai—a spectacle authorities blamed on irresponsible farmers.

China's government has pushed modernization, in part by offering subsidies for farmers to build their herd sizes. Chinese companies such as China Mengniu Dairy Co. and Shuanghui International have increased the scopes of their operations. And big multinational food companies like Yum Brands Inc. are also urging consolidation of farming in China. Yum, which runs its KFC and Pizza Hut chains in China, pledged in February to cut all small scale chicken farmers from its supply chain after negative publicity over one of its suppliers caused sales to plummet.Bright Dairy & Food Co.'s 2010 purchase of a 51% stake in New Zealand's Synlait Milk Ltd. marked an effort to adopt modern dairy processing techniques following China's infant formula scandal.

While the $4.7 billion deal will give the Chinese group a major foothold in the U.S. food industry, the bigger story might be bringing an American brand to China, where food safety concerns are high and consumers place high levels of trust in Western products. Read more in Corporate Intelligence.

China's efforts are happening at the same time that the U.S. system of food production faces burgeoning backlash from critics at home who deride it as "factory farming" that contributes to less-healthful food and environmental problems. A series of documentaries and best-selling books that take issue with the U.S. food industry have helped fuel rising demand for meats and other foods made by organic producers, sometimes on small farms. Some of those critics have complained that the Shuanghui-Smithfield deal will exacerbate such problems as complex supply chains and food-contamination risks.

But despite some problems—Smithfield has had a handful of food recalls in the past decade—the U.S. meat-processing industry is generally seen as a global leader in food safety as well as being highly efficient. "The U.S. meat industry has done a remarkable job of making our meat supply safer," said Bill Marler, a Seattle lawyer who has represented victims of food-borne illnesses from meat and other food products for two decades.

Smithfield has played a major role in consolidation with acquisitions in the 1990s that turned it into the world's biggest hog farmer. Its plants have capacity to slaughter as many as 110,000 hogs a day. In its last fiscal year, it processed nearly 28 million. Its control of each stage of production helps Smithfield to trace back any problems with pathogens and address them.

"Their traceability is superb," said John Mabry, an Iowa State University professor who specializes in swine genetics. "If they can control everything from reproduction of pigs to processing to the grocery store, they can control food safety."

Smithfield declined to comment.

Shuanghui has grappled with food-safety problems. In 2011, Chinese health inspectors found clenbuterol—a food additive banned in China and the U.S.—in pork products from its subsidiary. The company apologized on its website and said it discontinued partnerships with producers using the additive, which speeds muscle growth in pigs but can cause headaches and an irregular heartbeat when consumed by humans.

While Shuanghui and Smithfield have said a big part of the proposed $4.7 billion deal would be to increase imports of Smithfield's pork into China and expand the distribution of those products, Shuanghui also appears intent on relying on the expertise of Smithfield's management team to enhance its pork-processing facilities in China. Shuanghui Chairman Wan Long said Wednesday the deal would give Shuanghui access to Smithfield's "best practices and operational expertise" as the company seeks to meet soaring appetite for pork from China's growing population.

Hogs in the U.S. are primarily raised in large, enclosed buildings on farms that tend to be spaced miles apart from each other. This helps control disease because the hogs generally have little to no exposure to other animals—including from neighboring farms—and limited contact with human caretakers.

U.S. hog farms follow strict protocols to prevent and contain disease outbreaks, and many have close working relationships with veterinarians.

"When you put pigs in a barn, it's like sending kids to school: One snotty nose in class and everyone has it," said Mike Haag, who raises 1,200 hogs on his Emington, Ill., farm, most of which are sold to Cargill Inc., one of the biggest U.S. meatpackers.

Smithfield and other pork producers in the U.S. follow a set of guidelines developed by the National Pork Board, an industry group, called the "Pork Quality Assurance Plus" program that governs the feeding and care of pigs. The system is voluntary, but 84% of the U.S.'s pork producers have gotten certified under the program, representing 75% of the U.S. pig inventory, according to the pork board.

Most American hog farmers won't allow someone who has visited another hog farm to come inside theirs for at least 48 hours. Visitors have to wash their hands and suit up in boots and coveralls supplied by the farm. Delivery trucks have to be washed and sanitized before entering some farms. In a method known as all-in, all-out production, a barn that houses a group of hogs sent to slaughter is washed before another group of hogs enters.

When a pig is sick, most farmers quarantine it in a "treatment pen," where antibiotics are given only when necessary.

In China, slaughtering methods vary and it is unclear how often pigs are stunned first so they don't feel pain. In the U.S., partly in response to complaints by animal-rights activists, handlers at slaughterhouses are supposed to keep pigs calm by moving them along in small groups, and the animals are required to be rendered unconscious and unable to feel pain before they are killed.

About half of U.S. slaughterhouses render pigs unconscious by applying electrical prods near the head and heart of the pigs. The other half expose pigs to carbon dioxide—a method pioneered in Europe that has gained favor in America in the past decade because the process prevents meat from bruising and some animal rights advocates feel it is more humane. In the carbon dioxide method, groups of five or six pigs are loaded into an elevator and then lowered into a chamber containing the gas. When they come out they are limp and unconscious. In both cases, the pigs are killed by puncturing their throats.

U.S. pigs sent to slaughterhouses are tattooed so that the meat can be traced back to the farm. U.S. Department of Agriculture inspectors are stationed at every U.S. meatpacking plant, where they look for signs of illness upon entry, conduct random samples to detect whether the meat contains antibiotics and where they inspect the organs and skin of the slaughtered pigs for disease.

China, in contrast, doesn't have government inspectors on site for the whole process at each meat-processing facility. Some modernized facilities have regular inspectors on hand, according to the USDA.

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